NISM Series VIII: Equity Derivatives Mock Test (Set 1) /50 NISM Series VIII – Equity Derivatives Mock Test (Set 1) 1 / 50 1. Who benefits from a high impact cost? a) Only arbitrageurs b) Neither buyers nor sellers c) Only buyers d) Only sellers Your answer is Incorrect Your answer is correct Explanation:Impact cost is the cost that the buyer or seller of stocks incur while executing a transaction due to prevailing liquidity conditions in that counter.A high impact cost will increase the purchasing price for the buyer and decrease the selling price for the seller.So a high impact cost is neither beneficial to the buyer nor the seller. 2 / 50 2. The initial margin for derivatives is determined considering how much the underlying market tends to change. Typically, _______ a) Higher the volatility, higher the initial margin b) Lower the volatility, higher the initial margin c) Higher the volatility, lower the initial margin d) None of the above Explanation:When the markets are very volatile, it could results in losses to the traders. So to safe guard the trading member and the trader, higher initial margin are levied on when volatility is high. 3 / 50 3. ________ is the measure of how much the option premium changes for a one-unit increase in volatility. a) Rho b) Delta c) Vega d) Theta Your answer is Incorrect Your answer is correct Explanation:Vega (ν) is a measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change in the underlying volatility. 4 / 50 4. In a derivatives exchange, the net worth requirement for a clearing member is higher than that of a non-clearing member. Is this statement True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:In a derivative exchange, the networth requirement for a clearing member is higher than that of a non-clearing member. 5 / 50 5. The risk that cannot be reduced through diversification of a portfolio is called _________. a) Operational Risk b) Systematic Risk c) Credit Risk d) Unsystematic Risk Explanation:An investor can diversify his portfolio and eliminate major part of price risk i.e. the diversifiable/unsystematic risk but what is left is the non-diversifiable portion or the market risk-called Systematic risk.Systematic risk can be caused due to unfavourable reasons such as act of nature like a natural disaster, changes in government policy etc. 6 / 50 6. Can you close a long position in a Put option by taking a short position in a Call option with the same exercise date and exercise price? a) Yes b) No Explanation:A long position in a Put Option can be closed out (squared up) only by selling the same Put Option. 7 / 50 7. After the start of the futures contract, if the price of the underlying asset goes up, then ________. a) A long position becomes unprofitable b) Basically. price change in underlying asset has no effect on long or short positions in futures c) A long position becomes profitable d) A short position becomes profitable Explanation:When the price of the underlying asset rises in the spot market, its price in the futures market will also rise. So, those who have purchased the futures (long postion) will make a profit. 8 / 50 8. There are many products in the market that give high returns in a risk-free manner – State whether True or False. a) False b) True Explanation:Returns are related to the risk taken and hence there cannot be a product in the market that gives high return in risk free manner.Investors should be careful of opportunities that promise spectacular profits or “guaranteed” returns. The deal sounds too good to resist. An individual may claim that unrealistic returns can be realized from “Low-Risk Investment Opportunities”, but one has to keep in mind no investment is risk-free. 9 / 50 9. What will be the Delta for a Far Out-of-the-money option? a) Near -1 b) Near 0 c) Near 2 d) Near 1 Your answer is Incorrect Your answer is correct Explanation:Delta for Out of the Money Call and Put option approaches zero as it nears expiry.Delta for In the Money Call option approaches 1 and delta for In the Money Put option approaches -1 as it nears expiry. 10 / 50 10. The term “mark-to-market” means _________. a) the every day revaluation of open positions by the exchanges to reflect profits and losses in the market b) the current / spot index price c) process by which a portfolio manager checks the daily profits / losses d) intimation from the broker to a client for additional funds Your answer is Incorrect Your answer is correct Explanation:Mark to Market (MTM) is a process by which margins are adjusted on the basis of daily price changes in the markets for underlying assets.The clearing member who suffers a loss is required to pay the MTM loss amount which is in turn passed on to the clearing member who has made a MTM profit. 11 / 50 11. The margining system for index futures is based on _______. a) Volume at risk b) Margin at risk c) Price at risk d) Value at risk Your answer is Incorrect Your answer is correct Explanation:As per the recommendations of Dr. L.C.Gupta Committee – Margins should be based on Value at Risk Methodology at 99% confidence. 12 / 50 12. Mr. Ashu has purchased 100 shares of ABC at Rs 980 per share. Anticipating a potential price decrease, he wants to safeguard himself from losses exceeding Rs. 1000 on this investment. What action should Mr. Ashu take? a) Place a limit buy order for 100 shares of ABC at Rs 990 per share b) Place a limit sell order for 100 shares of ABC at Rs 970 per share c) Place a stop loss order for 100 shares of ABC at Rs 990 per share d) Place a stop loss order for 100 shares of ABC at Rs 970 per share Your answer is Incorrect Your answer is correct Explanation:Mr. Ashu will lose Rs 1000 if the ABC share will fall by Rs 10 as he has 100 shares and a 10 rupee fall will lead to Rs 1000 loss.He has bought at Rs 980. So he will put the stop loss order at Rs 970 (980 – 10). 13 / 50 13. A call option gives the buyer the right to buy the underlying at market price – State True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:A call option gives the buyer the right to buy the underlying at a set price ie. the strike price and not the market price.CALL OPTION : An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. 14 / 50 14. A trader buys a January ABC stock futures contract at Rs 768 and the lot size is 1200. What is his profit or loss , if he squares off the position at Rs 778 ? a) Rs 12,900 b) Rs. 12,000 c) Rs 10,000 d) Rs 12,00,000 Your answer is Incorrect Your answer is correct Explanation:The trader buys at Rs 768 and sells off at Rs 778, so he makes a profit of Rs 10.Lot size is 1200. So the total profit is Rs 10 X 1200 = Rs 12000 15 / 50 15. A Professional Clearing Member of the derivatives segment ____________. a) does not have any trading rights b) should also become a member of the cash segment within 2 years c) should also be a member of the cash segment d) provides trading facility to its clients Explanation:Professional clearing member is not a Trading Member of the exchange and does not have trading rights. 16 / 50 16. Theta is a measure of the sensitivity of an option price to the passage of time, not changes in market volatility.- State True or False? a) False b) True Explanation:Theta : It is a measure of an option’s sensitivity to time decay. Theta is the change in option price given a one-day decrease in time to expiration. 17 / 50 17. Which one of these complaints against a trading member can an Exchange address for resolution? a) Complaints in respect of transactions which are already subject matter of Arbitrage proceedings b) Complaints regarding land dealings between a client and trading member c) Claims regarding unauthorized transaction in the client’s account d) Claims regarding notional loss for the disputed trade Your answer is Incorrect Your answer is correct Explanation:Complaints against trading members on account of the following can be taken by an Exchange for redressal :– Non-receipt of funds / securities– Non- receipt of documents such as member client agreement, contract notes, settlement of accounts, order trade log etc.– Non-Receipt of Funds / Securities kept as margin– Trades executed without adequate margins– Delay /non – receipt of funds– Squaring up of positions without consent– Unauthorized transaction in the account– Excess Brokerage charged by Trading Member / Sub-broker– Unauthorized transfer of funds from commodities account to other accounts etc. 18 / 50 18. In India, the clearing and settlement of derivatives trades are typically conducted through ___________. a) SEBI approved Clearing Corporation / Clearing House b) State Bank of India c) The Interbank Clearing House d) Euroclear Explanation:Clearing Corporation/ Clearing House is responsible for clearing and settlement of all trades executed on the F&O Segment of the Exchange.The clearing and settlement of derivatives trades would be through a SEBI approved clearing corporation /house. Clearing corporations/houses complying with the eligibility conditions as laid down by the L. C. Gupta committee have to apply to SEBI for grant of approval. 19 / 50 19. Delta is the change in option price given a one-point change in the price of the underlying asset, not the risk-free interest rate – State True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:Rho is the change in option price given a one percentage point change in the interest rate.Delta measures the sensitivity of the option value to a given small change in the price of the underlying asset. 20 / 50 20. Can a Clearing Member provide ‘Fixed Deposits’ as a component of liquid assets to the Clearing Corporation? a) Yes b) No Your answer is Incorrect Your answer is correct Explanation:Clearing member is required to provide liquid assets which adequately cover various margins and liquid Net-worth requirements.Liquid Assets can be in the form of Cash, Cash Equivalents (Government Securities, Fixed Deposits, Treasury Bills, Bank Guarantees, and Investment Grade Debt Securities) and Equity Securities. 21 / 50 21. Vega measures the change in delta concerning the change in the price of the underlying asset – State True or False? a) True b) False Explanation:Vega is a measure of the sensitivity of an option price to changes in market volatility.Gamma measures change in delta with respect to change in price of the underlying asset. 22 / 50 22. A short position in a PUT option is typically closed out by taking a long position in the same PUT option- State True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:A short position in a PUT option can be closed out by taking a long position in a same PUT option with same exercise date and exercise price. 23 / 50 23. Upon the final settlement, the buyer/holder of the option will acknowledge the advantageous disparity received from the seller/writer as ______ in the profit and loss account. a) Amortization b) Income c) Loan d) Expense Explanation:On exercise of the option, the buyer/ holder will receive favourable difference, between the final settlement price as on the exercise/expiry date and the strike price, which will be recognised as INCOME. 24 / 50 24. When the strike price increases, the premium on a call option typically increases, not decreases- State True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:The higher strike price would have a lower call option premium because the intrinsic value is low or nil. 25 / 50 25. Trading is permitted in the Indian Equity markets for which of the following: a) Individual stock futures options b) Index Options c) Individual stock options d) All of the above Your answer is Incorrect Your answer is correct Explanation:Index options allow traders to speculate or hedge based on the movement of an entire index (like Nifty or Sensex) rather than individual stocks. These options are actively traded in the Indian Equity markets.Individual stock options provide the right, but not the obligation, to buy or sell shares of a specific company at a predetermined price. These options are also actively traded in the Indian Equity markets. 26 / 50 26. Can the exercise price be more than, equal to, or less than the cash spot price? a) No b) Yes Your answer is Incorrect Your answer is correct Explanation:Exercise price means the Strike price for which options can be traded.For eg. – A scrip ABC has options trading at a strike price of Rs 100. The spot price (market price) can easily fluctuate as per market sentiments and can be above, below or equal to Rs. 100. 27 / 50 27. Is it possible to sell assets in the futures market without actually owning those assets? a) No b) Yes Explanation:One can sell futures / options etc. even if he does not own the underlying asset. 28 / 50 28. If there are three sets of futures contracts with durations of one, two, and three months open simultaneously in the derivatives futures market, how many calendar spreads can be created? a) 1 b) 3 c) 2 d) 4 Your answer is Incorrect Your answer is correct Explanation:The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3. 29 / 50 29. Is it true or false that all 50 stocks in the NSE Nifty index are given equal weight when calculating the index – State True or False? a) True b) False Explanation:The NIFTY 50 index is a well-diversified 50 companies index reflecting overall market conditions.NIFTY 50 Index is computed using free float market capitalization method. As per this method, the 50 stocks of Nifty are weighed as per their free float market capitalisation. For eg – Reliance Industry has a weightage of appx 7% where as Wipro has a weightage of appx 2% in Nifty. 30 / 50 30. What does a buyer get from a Call Option? a) Gives both the right and obligation b) The obligation but not the right c) Neither the right not the obligation d) The right but not the obligation Your answer is Incorrect Your answer is correct Explanation:A call option gives the buyer the right but not the obligation to buy from the seller an underlying at the prevailing market price on or before the expiry date. 31 / 50 31. Is it true or false that speculators are individuals who take risks, while hedgers are individuals who aim to reduce risk? a) False b) True Your answer is Incorrect Your answer is correct Explanation:Hedgers – They face risk associated with the prices of underlying assets and use derivatives to reduce their risk.Speculators/Traders – They try to predict the future movements in prices of underlying assets and based on the view, take positions in derivative contracts. 32 / 50 32. The funds and securities deposited in a client’s account _________. a) Can or cannot be attached depends on the decision of Clearing Corporation b) Can be attached for meeting the obligations of the broker on his proprietary account c) Cannot be attached for meeting the obligations of the broker on his proprietary account d) None of the above Your answer is Incorrect Your answer is correct Explanation:The securities or money deposited by clients cannot be attached for meeting broker’s obligation on his proprietary account.The broker has to maintain separate client bank account for segregation of client money.Also brokers should keep margins collected from clients in a separate bank account. 33 / 50 33. If a company in an index undergoes a stock split, what will be its impact on the index value? a) The index value will remain unchanged b) The index value will increase c) The index value can increase or decrease but this cannot be forecasted with accuracy d) The index value will decrease Explanation:A stock split lowers its stock price but doesn’t weaken its value to current shareholders as the number of shares increase proportionally.Stock Split has an effect on Options, Strike Price etc. but has no impact on the index as such. Therefore, when a stock which is part of the index has a stock split, it does not have an impact on the index. 34 / 50 34. ‘Time Decay’ is advantageous to the _________. a) Option Buyer and Seller equally b) Option Seller c) Option Buyer d) Neither the option buyer or seller Explanation:If all other factors affecting an option’s price remain the same, the time value portion of an option’s premium will decrease with the passage of time. This is also known as time decay. Options are known as ‘wasting assets’, due to this property where the time value gradually falls to zero.Any fall in premium is advantageous to the option seller. 35 / 50 35. Identify the correct statement about a Put option. a) A put option will give the buyer a right but not an obligation to sell to the writer an underlying at a specified price b) A put option will give the seller a right but not an obligation to buy from the buyer an underlying at a specified price c) A put option will give the buyer an obligation but not the right to sell to the writer an underlying at a specified price d) In a Put Option, both the buyer and seller have the obligation to buy and sell the underlying at a specified price Explanation:Options may be categorized into two main types: · Call Options · Put OptionsAn option, which gives the buyer/holder a right to buy the underlying asset, is called a call option; and an option which gives the buyer/holder a right to sell the underlying asset, is called a ’put option’.The buyer of an option is one who has a right but not the obligation in the contract. For owning this right, he pays a price called ‘option premium’ to the seller of this right. He has a right to buy the underlying asset in case of a call option and the right to sell the underlying asset in case of a put option. 36 / 50 36. Mr. Mehta has purchased a futures contract, and if the price goes up, in this situation, Mr. Mehta will _________. a) Make a loss b) Insufficient information to arrive at a conclusion c) Make a profit d) Make a profit or make a loss depending on the situation Explanation:Mr. Mehta has bought the future contract which means he believes that the prices will rise so that he can gain from it. So he will make a profit if the price rises. 37 / 50 37. How is a hedging forward contract recorded in the accounting books? a) The premium or discount will be amortized over the life of contract b) The premium or discount will be shown in the Profit and Loss Account c) No premium or discount will be recognised in the books of accounts d) The premium or discount will be ignored for accounting Explanation:Accounting for Forward Contract as per Accounting Standard – 11When forward contract is for hedging– The premium or discount (i.e., difference between the value at spot rate and forward rate) should be amortized over the life of contract.– Exchange difference (difference between the value of settlement date/ reporting date and value at previous reporting date/ inception of the contract) is recognized in Profit & Loss statement of the year.– Profit/ loss on cancellation/ renewal of forward contract are recognized in P&L of the year. 38 / 50 38. A derivative market helps in transferring the risk from __________. a) Speculators to Arbitrageurs b) Hedgers to Speculators c) Arbitrageurs to Hedgers d) Speculators to Hedgers Your answer is Incorrect Your answer is correct Explanation:Hedgers aim to hedge their risk and speculators/traders take the risk which hedgers plan to offload from their exposure.Speculators form one of the most important participants of the derivatives market, providing depth to the market. Hedgers may not be able to hedge, if speculators were not present in the system. 39 / 50 39. Which of these choices is an illustration of a Calendar Spread? a) Going short on the stock futures contract while simultaneously buying the stock b) Going short on the underpriced futures contract of one month and at the same time buying the overpriced futures contract of another month c) Buying stock futures contract while at the same time shorting the stock d) Buying the underpriced futures contract of one month and simultaneously selling the overpriced futures contract of another month Your answer is Incorrect Your answer is correct Explanation:Calendar spread refers to the arbitrage between futures contracts of different expiration months.In this strategy, the arbitrageur buys and sells the futures contracts of two different months. To execute this strategy, the arbitrageur must identify which contract to buy or sell. The principal rule of arbitrage is that one must buy the underpriced contract and sell the overpriced one.Hence, the arbitrageur needs to compute the fair price of both futures contracts and compare these with the traded prices, to decide which contract is overpriced and which one is underpriced. 40 / 50 40. Ms. Neha wants to ‘Sell’ in the futures market. To do this, she __________. a) need not own the underlying b) must own at least 50% of the underlying c) must own the underlying d) must own at least 25% of the underlying Explanation:Selling on a futures market does not need any delivery. Only margin is required to be paid to Buy/Sell on a futures market.Therefore, Ms. Neha can sell on the futures market even without owning the underlying. However, she needs to square up her position before the expiry. 41 / 50 41. The derivatives market assists in _________. a) The reallocation of risk among the market participants b) Transfer of risk from those who are exposed to risk but have low risk appetite to participants with high risk appetite c) Both of the above d) All of the above Your answer is Incorrect Your answer is correct Explanation:Derivatives play a positive role by reallocating risks. They help in transfer of various risks from those who are exposed to risk but have low risk appetite (Hedgers) to participants with high risk appetite (Speculators). For example, hedgers do not want any risk where as traders/speculators are willing to take risk.Derivatives were first invented as a Hedgeing tool so that people who wanted to play safe can use them to transfer the risk by hedgeing. 42 / 50 42. Identify the incorrect statement regarding Options. a) Option contracts are NOT symmetrical regarding the rights and obligations of the parties involved b) ions contracts have non-linear payoffs c) Options contracts have linear payoffs d) Buyer of an option gets the right while seller of an option bears the obligation Your answer is Incorrect Your answer is correct Explanation:In case of futures contracts, long as well as short position has unlimited profit or loss potential. This results into linear payoffs for futures contracts. However, option contracts do not have linear payoffs as the buyers and sellers have different obligations and risk factors.The buyer of an option has limited risk (premium which he pays) but can earn unlimited profits whereas the seller of the option has unlimited risk but can earn only limited profits (premium which he receives).Option contracts are not symmetrical as the buyers and sellers have different obligations and risk factors. The buyer has limited risk where as seller of an option has unlimited risk. 43 / 50 43. ‘SCORES’ is the name given to _________. a) Exchange’s risk management and margin system b) Securities Collateral Records System c) SEBI’s web-based compliant redressal system d) Suspicious transaction reporting system Your answer is Incorrect Your answer is correct Explanation:SEBI’s web-based complaints redressal system is called SCORES (Sebi COmplaints REdress System).SCORES is a centralized grievance management system with tracking mechanism to know the latest updates and time taken for complaint resolution. 44 / 50 44. A clearing member reaches his prescribed position limits; therefore, he will ________. a) not be able to open new positions b) be allowed to take only 5% additional exposure c) be able to take fresh new positions for his clients but not in his proprietary account d) not be able to reverse his position Explanation:A trading member, on reaching the prescribed limits, cannot open new positions. But he can reverse existing positions.Position limits are an important part of the risk management framework of a derivatives exchange. A position limit on a derivatives exchange is a restriction on the ownership that limits the number of derivatives contracts that a trading member or client, acting individually or together with others, can own.When client-level position limits are exceeded, the clearing member/ trading member must ensure that the client does not take any fresh positions and the existing positions must be reduced within permissible limits. 45 / 50 45. A calendar spread in index futures will be considered as _________ in a far-month contract if the near-month contract expires. a) Short position b) Naked position c) Long position d) Optional position Your answer is Incorrect Your answer is correct Explanation:A naked position is long or short in any of the futures contracts but a spread position consists of two opposite positions.A calendar spread becomes a naked/open position, when the near month contract expires or either of the legs of spread is closed. 46 / 50 46. The clearing member is free to close out transactions of a trading member if ________. a) The trading member has not paid daily settlement dues b) The trading member has not paid initial margin money c) In both the above cases Your answer is Incorrect Your answer is correct Explanation:The following are some of the compliance lapses which attract penal charges:– Non fulfilment of initial margin obligations – Non-fulfilment of settlement obligation – Non-fulfilment of securities deliverable obligation – Non-fulfilment of minimum deposit requirements etc.In the event of a violation, Clearing Corporation may advice the Exchanges to withdraw any or all of the membership rights of the clearing member including the withdrawal of trading facilities of all trading members and/or clearing facility of custodial participants clearing through such clearing members, without any notice.In addition, the outstanding positions of such clearing member and/or trading members clearing and settling through such clearing member, may be closed out and such action shall be final and binding on the clearing member and/or trading member. 47 / 50 47. Identify the contract that is cleared and settled bilaterally. a) A one-month GOI bond futures contract b) A one month Nifty futures contract c) A one-month USDINR options contract d) A 3-month forward contract to buy Swiss Francs against the Indian rupee Your answer is Incorrect Your answer is correct Explanation:Bilateral contract between is a contract between two parties. Generally, all Forward contracts are bilateral contracts and are not done on any Exchange.In the above options, only ‘A 3-month forward contract to buy Swiss Francs against the Indian rupee’ is a forward contract and the other three are futures / options contract. A futures contract is an agreement made through an organized exchange to buy or sell a fixed amount of a commodity or a financial asset on a future date at an agreed price. 48 / 50 48. When the volatility of the underlying stock decreases, the premium of its Call option will _______. a) Decrease b) Increase c) Not change Explanation:Higher volatility = Higher premium, Lower volatility = Lower premium (for both call and put options).Therefore, with a decrease in volatilty, the premium on the call option decreases. 49 / 50 49. A European call option grants the buyer the right, but not the obligation, to purchase the underlying asset from the seller at the current market price ________. a) On or before the expiry date b) Only on the expiry date c) One day after the expiry date d) One day preceding the expiry date Your answer is Incorrect Your answer is correct Explanation:European option: The owner (buyer/holder) of a European option can exercise his right only on the expiry date/day of the contract. In India, all index and stock options are European style options.American option: The owner (buyer/holder) of an American option can exercise his right at any time on or before the expiry date/day of the contract. 50 / 50 50. In futures trading, the margin is paid by ________. a) Both Buyer and Seller b) The Buyer only c) The Seller only d) The Clearing Corporation Your answer is Incorrect Your answer is correct Explanation:The amount one needs to deposit in the margin account at the time of entering into a futures contract is known as the initial margin.In case of futures, both the buyer and seller are required to pay initial margin as decided by exchanges for entering into futures contract.In case of Options, the initial margin is paid only by the sellers. The option buyers have to pay the premium to the option sellers. Your score is 0% Restart quiz Exit
